Legacy Busi­ness as Heir­loom: Char­ting the Future

Family firms account for 70% of the global GDP and 60% of global employ­ment, according to a recent study by INSEAD busi­ness school. They are a key driver of global busi­ness and growth, so their sustained long-term value crea­tion is important for the global economy as a whole.

Martin Roll

is a global busi­ness stra­te­gist with more than 25 years ́ expe­ri­ence advi­sing Fortune 500 compa­nies, Asian firms and global family-owned busi­nesses. He is an expert on buil­ding strong global brands and mana­ging leadership in high-performing, marke­ting-oriented busi­nesses. The best­sel­ling author of “Asian Brand Stra­tegy” is curr­ently writing two new books on family busi­ness stra­tegy and successful global leadership. Martin Roll holds an INSEAD MBA. He is a Distin­guished Fellow and an Entre­pre­neur in Resi­dence at INSEAD.

Want to get to know Martin Roll?

Still curious? There is more to see here:

However, long-term success of family firms is not a given, and it defi­ni­tely not an easy task. There are many comple­xi­ties involved when ownership, manage­ment and family roles overlap, and there are less clear distinc­tions between them.

A Chinese proverb states that “wealth shall not pass three genera­tions”. The first genera­tion builds wealth, the second manages it, and the third genera­tion destroys it. The chal­lenge often arises when next genera­tion takes over from the original founder, who had made personal invest­ments into the busi­ness, whereas the next genera­tion tends to have less of an emotional connec­tion.

However, the foun­ders and genera­tions coming after them also have obli­ga­tions to fulfil in order to ensure a smooth succes­sion to future genera­tions. Unfor­tu­n­a­tely, they are not always forth­co­ming or willing to engage, which leads to fric­tion, conflicts, and lack of commit­ment from the next genera­tion. A long­term part­nership requires both parties to be moti­vated from the start. That being said, there are cases where family busi­nesses have managed to over­come this chal­lenge. Hoshi Ryokan from Japan is an example of longe­vity. Opera­ting a tradi­tional Japa­nese guest­house-style hotel featuring hot spring spa baths, the company was founded in the year 718 and has spanned an incredible 46 genera­tions. This demon­strates that with regu­lated processes, proper gover­nance, and risk manage­ment, family firms can reign successful for genera­tions.

This article will outline some of the key success criteria that family firms can inte­grate into their busi­ness stra­tegy and opera­tions to ensure their longe­vity and prospe­rity.

FAMILY AND BUSINESS ARE COMPLEMENTARY ASSETS

The long-term value for family busi­nesses is driven by Perfor­mance (busi­ness) and Plat­form (family). Balan­cing the two drivers is critical, as is looking at stra­te­gies through a long-term outlook. Opti­mi­sing perfor­mance is crucial to survival as it gene­rates income and divi­dends, while the plat­form needs to have the right set-up and be fit for the purpose of the family.

Some­times success will come about from having the two pillars overlap in various ways, and some­times it is better to keep them sepa­rated. It is important to remember that one of the key charac­te­ri­stics of a family driven firm is that it is busi­ness with “heart and brain combined” as opposed to a pure share­holder value-driven company, like an insti­tu­tio­na­lised company.

THE IMPORTANCE OF OWNERSHIP, MANAGEMENT AND FAMILY ROLES

The family should consider whether their busi­ness could benefit from new ownership, such as external inve­stors, like private equity and larger compa­nies. Some key questions are whether suffi­cient capital is avail­able, whether large future invest­ments are necessary, whether the new owner has more expe­ri­ence, and whether anyone in the family has already shown inte­rest in running the busi­ness.

It is not easy for a family to invite external inve­stors on board or to sell the entire busi­ness, but a diffe­rent ownership set-up can be helpful as the family gets access to capital, valu­able know-how, global market access, and diverse leadership perspec­tives.

Fami­lies should also be prepared for external attempts to take over and ensure their ownership struc­ture can meet those chal­lenges. The family owners behind French luxury brand Hermès learned a hard lesson when luxury and fashion conglo­me­rate LVMH, led and controlled by Bernard Arnault, laun­ched an attempt to take over Hermès. Despite owning 70% of the shares across more than 70 family members, they could have lost the company enti­rely if they had not created a holding company that had the first right to buy any family shares. This was the mecha­nism they created so that mino­rity share­hol­ders could not divest to non-family inve­stors, shiel­ding against LVMH and other poten­tial aggres­sors in the future.

The manage­ment issue is important because the family needs to decide who will run the busi­ness, thus deter­mi­ning whether the CEO is a family member or an external talent. Selec­ting the best candi­date needs to be a formal process, but the issue is often loaded with conflicts due to personal expec­ta­tions, lack of inter­ge­nera­tional commu­ni­ca­tion, and unclear plans for success.

In Asia, commu­ni­ca­tion between genera­tions is typi­cally less direct in compa­rison to Western cultures. When combined with inherent respect for senio­rity, open discus­sions and poten­tial disagree­ments tend not to surface, so issues can hang in the air for a long time. In the next 5-10 years, many Asian family firms will have to go through succes­sion but their paths are less clear, despite the fact that the younger genera­tions are getting more outs­poken and are deman­ding clearer answers about the future.

Taking your time and drawing up a proper process, with expert help if possible, can help mini­mise conflicts and steer the family through the deci­sion. The key virtues here are pati­ence, inclu­si­veness and trans­pa­rency.

When the Danish family-owned LEGO found itself struggling to trans­form its busi­ness to respond to its envi­ron­ment, the family decided to nomi­nate an external CEO. Jorgen Vig Knud­s­torp, a former McKinsey consul­tant, joined the LEGO group stra­tegy team and led the company’s stellar turnaround. It regained its pole posi­tion while the family took roles at board level.

Successful family busi­nesses are charac­te­rised by some distinct traits:

Estab­lish a clear view of what the family – and the busi­ness – brings to the world (purpose)

Why it matters to stake­hol­ders (finan­cial impact)

Who will do it (leadership)

How the family will do it (orga­ni­sa­tion & execu­tion)

When they do it (balance of time)

It is a careful and curated balance of past, present, and future.

LEGO has stated that their “ulti­mate purpose is to inspire and develop children to think crea­tively, reason syste­ma­ti­cally, and release their poten­tial to shape their own future – expe­ri­en­cing the endless human possi­bi­lity”.

Family busi­ness stra­tegy requires the crea­tion and defi­ni­tion of a distinct clarity at the core, the defi­ni­tion and agree­ment on a shared future vision among family members (often across multiple genera­tions with diverse perspec­tives and moti­va­tions), and the relent­less leadership and execu­tion of the overall future stra­tegy.

FAMILY FIRMS SHOULD EMBRACE CONSTANT CHANGE WITH A LONG-TERM VIEW

Leadership in the 21st century will be influ­enced by constant change. Next-genera­tion family leadership will have to deal effec­tively with multiple deman­ding global chal­lenges span­ning from geopo­li­tical vola­ti­lity, tech­no­lo­gical disrup­tions, economic and poli­tical uncer­tainty, the rise of new chal­len­gers like China, and shif­ting demo­gra­phics.

The impli­ca­tions for next-genera­tion family busi­ness leaders include lear­ning to view chal­lenges from both a short-term and long-term perspec­tive, build resi­li­ence and character, keep both a hori­zontal (indu­stry) and vertical (company) outlook, balance global perspec­tives and local insights, and develop strong leadership stra­te­gies.

Successful family busi­ness leaders develop and employ six important stra­tegic skills and personal traits which will help them to lead with clarity through turbu­lent times:

PURPOSE: Clarity of thought and clear personal vision to lead the company, and pursuing this objec­tive with unwa­vering focus

RESILIENCE: A strong character and the capa­city to recover quickly from difcul­ties is also essen­tial for mana­ging tumul­tuous busi­ness changes and staying ahead of the curve

NETWORKS: Crucial in family busi­nesses as a strong network of leaders will enable a leader to put across rele­vant messages and effect change

LONG-TERM OUTLOOK: Family busi­ness leaders also need to have a long-term lens in order to look beyond quick returns, allo­wing them think and plan stra­te­gi­cally to unlock sustainable busi­ness value. Family busi­nesses in them­selves are espe­ci­ally condu­cive to this

ADAPTATION AND AGILITY: Inno­va­tion is beco­ming a hygiene factor in busi­ness today, and family busi­ness leaders need to inte­grate disrup­tion manage­ment into their stra­te­gies. This is not always easy as people want to main­tain the harmony and peace within the family, as is often the case within Asian cultures

PEOPLE AND CULTURE: Last but not least, it is also important for a family busi­ness leader to be directed by their culture, ethics, values, and beliefs, as this will create authen­ti­city – some­thing that is highly over­looked in brand buil­ding and stra­tegic manage­ment

The success of next genera­tion family busi­ness leaders will be defined by their ability and willing­ness to drive a powerful trans­for­ma­tion agenda across their orga­ni­sa­tions: being daring, bold, and diffe­rent.

Martin Roll

is a global busi­ness stra­te­gist with more than 25 years ́ expe­ri­ence advi­sing Fortune 500 compa­nies, Asian firms and global family-owned busi­nesses. He is an expert on buil­ding strong global brands and mana­ging leadership in high-performing, marke­ting-oriented busi­nesses. The best­sel­ling author of “Asian Brand Stra­tegy” is curr­ently writing two new books on family busi­ness stra­tegy and successful global leadership. Martin Roll holds an INSEAD MBA. He is a Distin­guished Fellow and an Entre­pre­neur in Resi­dence at INSEAD.